Run at Triple Crown stir your blood?

Better to bet on the ponies than own them

ELMONT, N.Y. (CBS.MW) -- Interest in horse racing has been piqued as War Emblem bids to become just the 12th-ever Triple Crown winner -- and the first in 24 years -- in Saturday's Belmont Stakes.

But the track to riches in thoroughbred racing is a tenuous one indeed, and anyone contemplating getting into the sport must understand both the risks and the potential rewards of horse ownership. See author interview.

The tax code offers a helping hand to those for whom horse racing is a business. But if your participation is deemed nothing more than a hobby, you'll lose out no matter whether your horses win, place or show.

You don't have to look far to see what the vagaries of horse ownership can do. War Emblem is a classic example.

Russell Reineman, an 84-year-old steel-supply-company owner who has been a thoroughbred investor in the Chicago area for decades, owned the 3-year-old colt until three weeks before the horse's surprise victory in the Kentucky Derby launched his Triple Crown aspirations.

But facing mounting losses at his company, which had supported his thoroughbred business over the years, Reineman sold 90 percent of his interest in War Emblem following the horse's April 6 victory in the Illinois Derby to the Thoroughbred Corp., a holding company headed by Prince Ahmed bin Salman of the Saudi royal family.

The prince, a major player in horse racing in this country and around the world over the past 22 years, paid $900,000 for that 90 percent stake; Reineman had initially paid $20,000 for War Emblem at the Keeneland September Yearling Sale in 2000.

"Everybody buys the Derby, because you have to buy a horse or raise a horse to win," the exultant prince said after winning the country's most prestigious race May 4. "I always look for any horse good in the world at a good budget.

"When you raise a horse, don't you pay keeping and training fees and on and on? That's called spending money, isn't it?"

Reineman told the Chicago Tribune that he had no regrets about having given up the colt, and his retention of a 10 percent interest could be worth plenty -- War Emblem would command as much as $40 million as a stud prospect if he wins Saturday.

Longshots abound

But War Emblem's improbable journey from relative obscurity in Cicero, Ill., to toast of the town in New York City is a long shot in thoroughbred annals.

"It isn't a business for the faint of heart," owner Bob Lewis told CBS.MarketWatch.com's Victoria Fung. See video report.

"While some horses may gallop their way to greatness, it's important to keep in mind that, unlike traditional investment properties, they're living creatures. They can get sick or injured -- or, in a key race, they can simply have a bad day, regardless of their cost or bloodlines. That's what makes this sometimes more of a gamble than an investment."

Often, horses never even make it to the racetrack. And that can be hard for fledgling owners to swallow, especially given the costs involved.

The top horses are generally sold as yearlings, and, in the best of circumstances, they are a year away from the track at that point. At select yearling sales in Kentucky, the average price is likely to be around $250,000. But you can pay a lot more. Bloodstock agent Andy Havens offers advice.

You might buy a young state-bred horse from venues such as Illinois or New York for much less -- $2,500 or so. Those horses certainly will not have the pedigree of the elite thoroughbreds and would be unlikely to even sniff the roses on Kentucky Derby day. But they can make useful and profitable runners in state-enriched races at many locales.

You can pay just about any price and get a horse that is already racing. There are claiming races at tracks all around the country where any horse running can be bought for the conditioned price of the race -- from $2,500 at Mountaineer in West Virginia to $100,000 at Santa Anita in California.

The purchase price of the horse, as alluded to by the prince, is only the beginning, however. Depending on where you intend to race, it can cost anywhere from $10,000 to $40,000 a year to keep a horse in training, including veterinary and insurance costs.

For yearling purchasers, that can mean a $100,000 commitment before a horse leaves the starting gate for the first time with a chance to earn its keep.

Contact the owners and breeders organization in your state. Inquire about services offered and membership benefits. Become involved with the organizations and make personal contact with local horsemen.

Participate in industry-sponsored events and educational programs. Check at your local race track, which is often the site of such programs.

Define reasonable goals and objectives. How much money can you afford to allocate to the business? Generally speaking, the level of investment is the primary consideration in determining the most appropriate means of becoming an owner. Develop a budget, identifying the amount to be utilized for the initial purchase, and obtain realistic estimates of daily expenditures.

Business considerations

There are various types of business entities utilized to conduct horse racing and breeding activities. You can operate as a sole proprietorship, a general partnership, limited partnership, syndicate, C corporations, S corporations and limited liability companies. The tax implications vary.

It is also important to make the distinction between horse racing as a business and as a hobby. It's a distinction the IRS will use to determine whether you are engaged in the activity for profit, in which case you can write off most of your business losses, or for fun, in which case your deductions are limited. See more tax advice.

Just a gambler?

If your sole involvement in horse racing is betting, you may still run into tax concerns. But only if you win big. Gambling winnings are fully taxable and must be reported on your tax return. You must file Form 1040 and include all of your winnings on line 21. For additional information, refer to Publication 525 (PDF), Taxable and Nontaxable Income.

If you receive $600 or more in gambling winnings, the payer generally is required to issue you a Form W-2G. If you have won more than $5,000, the payer generally is required to withhold 27 percent of the proceeds for Federal Income Tax.

You can deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on Schedule A Form 1040, line 27.

However, the amount of losses you deduct cannot be more than the amount of gambling income you have reported on your return. You'll also need to keep comprehensive records to back up your claim of losses.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.